The UK’s composite PMI dropped to a 2-month low of 51.0, down from 52.0 in June. This fall was mainly due to a slowdown in the services sector, where the PMI decreased from 52.8 to 51.2. However, the manufacturing PMI improved, rising to a 6-month high of 48.2 from 47.7. In July, private sector businesses increased their prices, causing inflation to rise for the first time since April. Ongoing inflation makes it hard for the Bank of England to implement further easing measures to support economic growth. The swaps market indicates a 95% chance of a 25 basis point rate cut to 4.00% at the August 7 meeting, with a total expected cut of 75 basis points over the next year.

Challenges For The Pound Sterling

The tough economic situation in the UK, marked by slow growth and high prices, is creating challenges for the Pound Sterling, especially against the Euro. We believe traders should expect the Pound Sterling to weaken further. The drop in the services PMI—an essential part of the UK economy—points to slowing growth, which will likely prompt action from the Bank of England. A recent S&P Global survey showed that diminished domestic demand is a significant factor behind the slowdown. The rise in price pressures, even with slower growth, creates a tricky situation. Although the official CPI inflation rate for June was 2.0%, the latest PMI data shows businesses are already hiking prices again, indicating that inflation remains stubborn. This conflict between slowing growth and persistent prices puts pressure on the central bank, but the need to support growth will likely take priority.

Strategies For Traders

Traders should prepare for the likely rate cut in August, as suggested by the swaps market. Historically, when easing begins, currencies often weaken, especially if other central banks aren’t following suit. We think there’s an opportunity in strategies that profit from falling UK interest rates and rising bond prices in the coming months. One of the simplest strategies is to short the Pound against the Euro. The UK’s stagflation contrasts with the Eurozone, where recent data, while soft, doesn’t show the same extreme price pressures coupled with slow growth. This difference in policy should benefit the Euro, making derivatives like EUR/GBP call options an appealing way to take advantage of this outlook. Create your live VT Markets account and start trading now.

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